In November, Bloomberg hosted the launch of the E-RISC (Environmental Risk in Sovereign Credit) report in London with Global Footprint Network and UNEP-FI. The report demonstrates that resource constraints are material for sovereign credit analysis. We asked Gregory Elders, Bloomberg’s Senior (Environmental, Social and Governance) ESG Analyst, and Curtis Ravenel, Global Head of Sustainability Initiatives, for their thoughts about incorporating environmental risk into financial markets.
Gregory Elders has over ten years experience working with investors and companies to identify and assess sustainability risks and opportunities. His expertise is on valuing the financial impact of environmental, social and corporate governance performance on company returns, as well as identifying financially material ESG issues.
In his role as Global Head of Sustainability, Curtis Ravenel leads the integration of sustainability considerations into all firm operations and leverages the Bloomberg Professional Service to evaluate sustainability-related investment risks and opportunities for its 300,000 customers.
Q: Why is Bloomberg interested in being part of the move to incorporate environmental/natural resource risk into financial markets?
As an organization, Bloomberg thinks environmental—as well as social and corporate governance (ESG)—data is material to understanding company risk and performance. Bloomberg was founded on the idea of bringing transparency to the financial markets and continues to do that in everything we do. We think this is an area where potential risks and opportunities can be highlighted.
Just as importantly, our clients demand that we provide this data. It’s not just traditional ‘responsible’ investors, but all types of investors increasingly recognize that they need to understand and manage the ESG risks in their portfolio.
Q: What do you see as the biggest trends in incorporating ecological data into risk management and across the financial industry?
We think investors increasingly understand that ecological risks can pose a threat to financial returns – not necessarily all to the same severity – but there is definitely a potential, and at times significant, financial risk. Our clients are increasingly asking us to provide the data and tools to compare risk, like-for-like, across companies and countries. This is why offering data such as the Global Footprint Network’s National Footprint Accounts is so important.
The other trend we see is that investors want to be able to put a price tag on these risks. This is an avenue that Bloomberg is pursuing on many fronts – developing new tools to price ESG (environmental, social, and governance) risks and assessing potential equity and debt valuation impacts. To that end, we think one potential use of the detailed Global Footprint Network National Accounts datasets would be to investigate how commodity futures and other pricing information on the Bloomberg terminal could be overlaid to get at value investment risk.
Q: What do you see as the biggest challenges—and opportunities—for further integrating natural resource considerations and ecological risk into sovereign bond and country-level risk analyses and equities?
We think the biggest challenge is getting investors and rating agencies to understand that these risks can be measured, quantified, and then valued. The work Global Footprint Network has done is an important step in the measuring and quantifying process. The E-RISC results show that ecological risks can have a material financial impact. Further work needs to be done in understanding how the risks play out across additional countries, and under different events and circumstances. Also important is how to apply this data to look ahead to predict future returns by applying currently available ESG data.
Q: How do you see the Ecological Footprint being used by investors, asset managers, and credit rating agencies?
We see several immediate ways different Bloomberg clients could apply the Ecological Footprint data. Bloomberg formally unveiled its ESG Country Risk tool alongside the E-RISC launch in November. We think there is a lot of potential to take our model and incorporate the Global Footprint Network data. Similarly, we know many of our clients have developed their own risk assessment models and they could incorporate the Ecological Footprint data into their analytical approach. This could be as simple as considering the Ecological Footprint data as one of the assessment factors, to more nuanced valuation approaches centered around the Global Footprint Network data.
One of the really nice things about the large and diverse client base Bloomberg has is that there are lots of clever people with new and innovative ways of applying our data. Once you get it into the right hands and provide a little guidance, the possibilities become endless.
Q: The E-RISC report showed that 1)resource constraints and ecological risk are material for sovereign credit risk, 2)that ecological risk profiles vary considerably across nations (of the five case studies), and 3)that these five profiles don’t match up with traditional sovereign credit ratings. If these risks are already being borne out now (and not just looking to the long-term), why do you think the financial industry is slow to respond? Given these conclusions, what would you say to investors, asset managers, and rating agencies who fail to consider these findings?
We believe that more and more investors are opening their eyes to the types of risks explained in the E-RISC report, but we think to some extent they are being bombarded with too much information and not a clear investment thesis for why it matters. We – Global Footprint Network, Bloomberg and the ESG investing community – need to do more work to show how data like the National Footprint Accounts can be integrated into existing analyst valuation approaches. Financial analysts who are used to looking at financial data need help understanding how to use all of this ‘new’ data that is increasingly available.
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